Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐



 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  ☒    NO    ☐



 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as described in Rule 12b-2 of the Exchange Act).YES ☐    NO ☒

As of April 30, 2015 there were 4,927,797 shares of common stock, par value $.01 per share, outstanding.

 

 

---

 

 

 

 

SUPERTEL HOSPITALITY, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

 

 

 

 

 

 

 

---

 

     

 

 

 

 

---

 

 

 

 

---

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

---

 

General

 

Supertel Hospitality, Inc. (SHI) was incorporated in Virginia on August 23, 1994.  We reincorporated in Maryland on November 19, 2014. SHI is a self-administered real estate investment trust (REIT) for federal income tax purposes.

 

SHI, through its wholly owned subsidiaries, Supertel Hospitality REIT Trust and E&P REIT Trust (collectively, the “Company”) owns a controlling interest in Supertel Limited Partnership (“SLP”) and E&P Financing Limited Partnership (“E&P LP”). The Company owns 52 properties as follows:

 

SHI, through Supertel Hospitality REIT Trust, is the sole general partner in SLP and at March 31, 2015, owned approximately 93% of the partnership interests in SLP.  SLP is the general partner in SBILP.  At March 31, 2015,  SLP and SHI owned 99% and 1% interests in SBILP, respectively, and SHI owned 100% of Supertel Hospitality Management, Inc, SPPR Holdings, Inc. (SPPRHI), BMI Alexandria Holdings, Inc. (BAHI) and SPPR-Dowell Holdings, Inc. (SDHI). SLP and SPPRHI owned 99% and 1% of SHLLC, respectively, SLP and BAHI owned 99% and 1% of BAL, respectively, SLP owned 100% of SSBLLC and SLP and SDHI owned 99% and 1% of SDLLC, respectively.  References to “we”, “our”, and “us”, herein refer to Supertel Hospitality, Inc., including as the context requires, its direct and indirect subsidiaries.

 

As of March 31, 2015, the Company owned 52 limited service hotels, 46 of which are included in continuing operations.  All of the hotels are leased to our wholly owned taxable REIT subsidiary, TRS Leasing, Inc. (“TRS”), and its wholly owned subsidiaries (collectively “TRS Lessee”), and are managed by eligible independent contractors: Hospitality Management Advisors, Inc. (“HMA”), Strand Development Company, LLC (“Strand”), Kinseth Hotel Corporation (“Kinseth”) and Cherry Cove Hospitality Management, LLC (“Cherry Cove”). 

 

HMA manages 15 Company hotels in Arkansas, Louisiana, Kentucky, Indiana, Virginia and Florida.  Strand manages the Company’s five economy extended-stay hotels in Georgia and South Carolina as well as 12 additional Company hotels located in Georgia, Maryland, North Carolina, Pennsylvania, Tennessee, Virginia, and West Virginia.  Kinseth manages 19 Company hotels in seven states primarily in the Midwest. Cherry Cove manages one Company hotel in Maryland.  Currently, each of the management agreements with HMA, Strand and Kinseth expires on May 31, 2015, and the management agreement with Cherry Cove expires on May 24, 2015. The management agreements renew for additional terms of one year unless either party to the agreement gives the other party written notice of termination at least 90 days before the end of a term. The Company issued written notices and is currently in negotiations with the management companies regarding terms of the agreements.

 

Each of HMA, Strand, Kinseth, and Cherry Cove receives a monthly management fee with respect to the hotels they manage equal to 3.5% of the gross hotel revenue and 2.25% of hotel net operating income (“NOI”).  NOI is equal to gross hotel income less operating expenses (exclusive of management fees, certain insurance premiums and employee bonuses, and personal and real property taxes).

 

The management agreements generally require TRS Lessee to fund debt service, working capital needs, capital expenditures and third-party operating expenses for the management companies excluding those expenses

---

 

not related to the operation of the hotels. TRS Lessee is responsible for obtaining and maintaining insurance policies with respect to the hotels.

 

The hotel industry is seasonal in nature. Generally, occupancy rates, revenues and operating results for hotels operating in the geographic areas in which we operate are greater in the second and third quarters of the calendar year than in the first and fourth quarters, with the exception of our hotel located in Florida, which experiences peak demand in the first and fourth quarters of the year.

 

Consolidated Financial Statements

 

The Company has prepared the condensed consolidated balance sheet as of March 31, 2015, the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014, and the condensed consolidated statements of cash flows for the three months ended March 31,  2015 and 2014 without audit, in conformity with U. S. generally accepted accounting principles (GAAP).  In the opinion of management, all necessary adjustments (which include only normal recurring adjustments) have been made to present fairly the financial position as of March 31, 2015 and the results of operations and cash flows for all periods presented.  Balance sheet data as of December 31, 2014 has been derived from the audited consolidated financial statements as of that date. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period.  Actual results could differ from those estimates.

 

Certain information and footnote disclosures, normally included in financial statements prepared in accordance with U.S. GAAP, have been condensed or omitted, although management believes that the disclosures are adequate to make the information presented not misleading.  These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.  The results of operations for the three months ended March 31, 2015 are not necessarily indicative of the operating results for the full year.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU No. 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. Currently, debt issuance costs are recorded as an asset and amortization of these deferred financing costs is recorded in interest expense. Under the new standard, debt issuance costs will continue to be amortized over the life of the debt instrument and amortization will continue to be recorded in interest expense. The new standard is effective for the Company on January 1, 2016 and will be applied on a retrospective basis. The Company is currently evaluating the effect that ASU 2015-03 will have on its consolidated financial statements and related disclosures.

 

 

---

 

Derivative Liabilities 

 

Series C Convertible Preferred Stock and Warrants

 

The conversion feature embedded in the Series C convertible preferred stock was evaluated, and it was determined that the conversion feature should be bifurcated from its host instrument and accounted for as a freestanding derivative. In addition the common stock warrants issued with the Series C convertible preferred stock were also determined to be freestanding derivatives.

 

The amendment to the Company’s articles of incorporation, setting forth the terms of the Series C convertible preferred stock, the host instrument, includes an antidilution provision that requires an adjustment in the common stock conversion ratio should subsequent issuances of the Company’s common stock be issued below the instruments’ original conversion price of $8.00 per share. Accordingly we bifurcated the embedded conversion feature which is shown as a derivative liability recorded at fair value on the accompanying consolidated balance sheets as of March 31, 2015 and December 31, 2014. As a result of a subscription rights offering by the Company which concluded on June 6, 2014, the conversion price of the Series C convertible stock, pursuant to its terms, was adjusted to $1.60, the exercise price of the subscription rights for a share of common stock. The antidilution provision continues to be in effect, and treatment of the embedded conversion feature as a derivative liability remains unchanged.

 

The agreement setting forth the terms of the common stock warrants issued to the holders of the Series C convertible preferred stock also includes an antidilution provision that requires a reduction in the warrants’ exercise price of $9.60 should the conversion ratio of the Series C convertible preferred stock be adjusted due to antidilution provisions.    Accordingly, the warrants do not qualify for equity classification, and, as a result, the fair value of the derivative is shown as a derivative liability on the accompanying consolidated balance sheets as of March 31,  2015 and December 31, 2014. As a result of a subscription rights offering by the Company which concluded on June 6, 2014, the exercise price of the warrants for a share of common stock was adjusted to $1.92,  equal to 120% of the adjusted conversion price of the Series C convertible preferred stock. The antidilution provision remains in effect, and treatment of the warrants as a derivative liability remains unchanged.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value measurements are utilized to determine the value of certain liabilities, to perform impairment assessments, and for disclosure purposes.  In February 2012 the Company issued financial instruments with features that were determined to be derivative liabilities, and as a result must be measured at fair value on a recurring basis under Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 820-10 Fair Value Measurements and Disclosures – Overall.  In addition we apply the fair value provisions of ASC 820-10-35 Fair Value Measurements and Disclosures – Overall – Subsequent Measurement, for our nonfinancial assets which include our held for sale hotels, and the disclosure of the fair value of our debt.

 

---

 

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, as well as inputs other than quoted prices that are observable for the asset or liability such as interest rates and yield curves that are observable at commonly quoted intervals.

 

Level 3 nonfinancial asset valuations use unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.  We develop these inputs based on the best information available, including our own data. Financial asset and liability valuation inputs include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the liability; this includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

 

Nonfinancial assets

 

Nonfinancial asset fair value measurements are discussed below in the note “Impairment Losses.”

 

Financial instruments

 

As of March 31, 2015 and December 31, 2014, the fair value of the derivative liabilities in connection with the February 2012 issuance was determined by the Monte Carlo simulation method.  The Monte Carlo simulation method is a generally accepted statistical method used to generate a defined number of stock price paths in order to develop a reasonable estimate of the range of future expected stock prices of the Company and its peer group and minimizes standard error.

 

The fair value of the Company’s financial liabilities carried at fair value and measured on a recurring basis as of March 31, 2015 and December 31, 2014 are as follows (in thousands):

 

 

There were no transfers between levels during the three months ended March 31, 2015 and the twelve months ended December 31, 2014.

 

---

 

The following table presents a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3), and the realized and unrealized (gains) losses recorded in the Consolidated Statement of Operations in Derivative gain  (loss) during that period (in thousands): 

 

 

The Company estimates the fair value of its fixed rate debt by discounting the future cash flows of each instrument at estimated market rates or credit spreads consistent with the maturity of the debt obligation with similar credit policies. Credit spreads take into consideration general market conditions and maturity. The inputs utilized in estimating the fair value of debt are classified in Level 2 of the hierarchy. The carrying value and estimated fair value of the Company’s debt as of March 31, 2015 and December 31, 2014 are presented in the table below (in thousands):

 

---

 

 

 

Hotel Dispositions

 

Effective October 1, 2014, the Company adopted ASU Update No. 2014-08 concerning the classification and reporting of discontinued operations. This amendment defines discontinued operations as a component of an entity that represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. As a result of the adoption of ASU Update No. 2014-08, we anticipate that most of our hotel dispositions will not be classified as discontinued operations as most will not fit this description.

 

For transactions that have been classified as held for sale or as discontinued operations for periods prior to adoption of ASU 2014-08, the Company will continue to present the operating results as discontinued operations in the statements of operations for all applicable periods presented.

 

Sold Hotels - Continuing Operations

 

On March 19, 2015 the Company closed on the sale of a Sleep Inn in Omaha, Nebraska, to an unaffiliated buyer for a gross sales price of $2.9 million, with no gain on the sale and reduction of the Company’s mortgage debt of $2.5 million. The operating results of this hotel are included in earnings from continuing operations.  

 

Sold Hotels - Discontinued Operations

 

The operating results of the three hotels below which were sold are included in gain/loss from discontinued operations, net of tax as shown in the condensed consolidated statement of operations for the three months ended March 31, 2015 and 2014.

 

On January 15, 2015 the Company closed on the sale of a Super 8 in West Plains, Missouri to an unaffiliated buyer for a gross sales price of $1.5 million, with a gain on sale of $0.9 million and reduction of the Company’s mortgage debt of $1.4 million.

 

On January 29, 2015 the Company closed on the sale of a Super 8 in Green Bay, Wisconsin, to an unaffiliated buyer for a gross sales price of $2.2 million, with no gain on the sale and reduction of the Company’s mortgage debt of $1.5 million.

 

On March 16, 2015 the Company closed on the sale of a Super 8 in Columbus, Georgia, to an unaffiliated buyer for a gross sales price of $0.9 million, with no gain on the sale and reduction of the Company’s mortgage debt of $0.9 million.

 

Hotels Held For Sale

 

The two hotels classified as held for sale in the first quarter of 2015 are the Comfort Inn and the Days Inn in Alexandria, Virginia. The operating results of the Comfort Inn and Days Inn hotels are $(120,348) and$(980,494) 

---

 

for March 31, 2015 and $(220,178) and $(123,042) for March 31, 2014.  The Days Inn operating results for March 31, 2015 include an impairment expense of $0.9 million,  which was recognized as of March 31, 2015 upon the hotel’s classification as held for sale. Earnings attributable to noncontrolling interest from the two hotels for the three months ended March 31, 2015 and 2014 is approximately $(121,000) and $0, respectively.

 

A REIT will incur a 100% tax on the net gain derived from any sale or other disposition of property that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We do not believe any of our hotels were held primarily for sale in the ordinary course of our trade or business. However, if the Internal Revenue Service would successfully assert that we held such hotels primarily for sale in the ordinary course of our business, the gain from such sales could be subject to a 100% prohibited transaction tax.

 

Assets held for sale consisted of the following as of March 31, 2015 and December 31, 2014:

 

 

The following table sets forth the components of discontinued operations for the three months ended March 31, 2015 and 2014. Discontinued operations include the results of operations for hotels sold in 2014 and the first quarter of 2015 (which were held for sale at December 31, 2014).

 

 

---

 

Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing earnings available to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed after adjusting the numerator and denominator of the basic EPS computation for the effects of dilutive potential common shares outstanding during the period, if any. The effects include adjustments to the numerator for any change in fair market value attributed to the derivative liabilities (related to the Series C convertible preferred stock and warrants, and the convertible loan) during the period the convertible securities are dilutive. The computation of basic and diluted earnings per common share is presented below:

---

 

 

* The loss (earnings) attributable to noncontrolling interest is allocated between continuing and discontinued operations for the purpose of the EPS calculation. Long Term Incentive Plan (“LTIP”) and common operating units of SLP have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would have no impact.

 

Potentially dilutive common shares, if any, have been excluded from the denominator if they are antidilutive to net earnings (loss) attributable to common shareholders. The number of weighted average shares of common stock for the three months ended March 31, 2015 is significantly higher than the outstanding shares at

---

 

March 31, 2014 due to the issuance of common stock from the rights offering during the last month of the second quarter of 2014.

 

The following table summarizes the weighted average of potentially dilutive securities that have been excluded from the denominator for the purpose of computing diluted earnings per share:

 

 

 

 

 

 

* LTIP and common operating units of SLP have been omitted from the denominator for the purpose of computing diluted earnings per share since the effect of including these amounts in the numerator and denominator would have no impact.

 

 

Debt Financing

 

A summary of the Company’s long term debt as of March 31, 2015 is as follows (dollars in thousands):

 

---

 

On January 15, 2015, the Company sold a Super 8 in West Plains, Missouri (49 rooms) for gross sale proceeds of $1.5 million. Net proceeds were used to pay off the associated loan with Great Western Bank.

On January 29, 2015, the Company sold a Super 8 in Green Bay, Wisconsin (83 rooms) for gross sale proceeds of $2.2 million.  Net proceeds were used to pay off the associated debt with GE and reduce the balance of the revolving credit facility with Great Western Bank.

On February 17, 2015, the maturity date of the Company’s $7.8 million GE loan was extended to December 15, 2015. A required principal payment of $0.3 million was paid on the loan in February 2015.

On March 16, 2015, the Company sold a Super 8 in Columbus, Georgia (74 rooms) for gross sale proceeds of $0.9 million. Net proceeds were used to pay off the associated loan with GE.

On March 19, 2015, the Company sold a Sleep Inn in Omaha, Nebraska (90 rooms) for gross sale proceeds of $2.9 million. Net proceeds were used to pay off the associated loan with Elkhorn Valley Bank.

At March 31, 2015, the Company had long-term debt of $64.5 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 1.9 years and a weighted average fixed interest rate of 5.8%. The Company has no variable interest rate loans as of March 31, 2015. Debt is classified as held for use if the properties collateralizing it are not held for sale. Debt is classified as held for sale if the properties collateralizing it are held for sale. Debt associated with assets held for sale is classified in the table below as due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the remainder of 2015 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):

 

At March 31, 2015 the Company had $40.4  million of principal due in 2015. Of this amount, $37.7 million of principal is due in 2015 pursuant to the notes and mortgages evidencing such debt. The remaining $2.7 million is associated with loans on assets held for sale and is not contractually due in 2015 unless the related assets are sold. The maturities comprising the $37.7 million consist of:

 

---

 

The maturity date on the $7.8 million GE loan has been extended to December 15, 2015 and a required principal payment of $0.3 million was paid on the loan in February, 2015. All of the GE loans are cross collateralized and the 13 assets securing the loans outstanding at March 31, 2015 are treated as a pool.  As of March 31, 2015, the Company had six GE hotel assets classified as held for sale. The required principal payment upon the sale of these six hotels is approximately $11.4 million. Upon sale the Company believes the net proceeds from the sale of these hotels will be sufficient to satisfy the debt with GE maturing in 2015.  In April of 2015, after the close of the first quarter of 2015, the Company sold two of the GE encumbered assets that were held for sale and $4.1 million of the sales proceeds were applied to the balance of the $7.8 million loan. If the four remaining hotels are not sold, the Company will attempt to refinance the debt with GE.

 

The $8.3 million loan with Middle Patent Capital, LLC is secured by two held for sale hotels located in Alexandria, Virginia.  On April 13, 2015, the Company entered into an agreement to sell these hotels for a purchase price of $19.0 million.  The sale is subject to completion of an inspection period without termination of the agreement by the purchaser and customary closing conditions.  If these hotels are sold pursuant to this agreement, the Company believes the net proceeds from the sale of these hotels will be sufficient to satisfy the debt with Middle Patent Capital, LLC maturing in 2015.  If the hotels are not sold pursuant to this agreement, the Company will attempt to refinance the debt with Middle Patent Capital, LLC or another lender.

 

The Company’s plan is to refinance the other debt maturing in 2015 with current or future lenders.

 

We are required to comply with certain financial covenants for some of our lenders.  As of March 31,  2015, we were in compliance with our financial covenants.  As a result, we are not in default of any of our loans.

 

Stock-Based Compensation

 

Non Vested Share Awards

 

On July 15, 2013, the Company granted share awards and stock options to an executive officer of the Company outside of the 2006 Stock Plan as an inducement material to the executive’s acceptance of employment. The share awards total 3,125 authorized but previously unissued shares of the Company’s common stock with a grant date price of $7.28. The shares vest based on continued employment of the executive, and the restrictions lapse in 33.3% increments on each of the first, second and third anniversaries of issuance. There were 2,084 and 3,125 unvested awards as of March 31, 2015 and 2014, respectively. The stock options entitle the executive to purchase 3,125 authorized but previously unissued shares of the Company’s common stock at an exercise price of $8.08 per share. The stock options have a four-year term and vest in equal one-third increments on each of the first, second and third anniversaries of issuance provided that the executive is employed by the Company on each such vesting date. The stock options and share awards will become fully vested in the event of a change of control of the company or upon the executive’s death or disability.

 

On March 2, 2015, the Company granted a warrant to an executive officer of the Company outside of the 2006 Stock Plan as an inducement material to the executive’s acceptance of employment. The warrant entitles the executive to purchase a total of 657,894 authorized but previously unissued shares of the Company’s common stock with a grant date price at (i) $1.52 per share (the adjusted closing bid price of the common stock on NASDAQ on March 2, 2015) if at least one-third but not more than one-half of the shares are purchased on or prior to March 17, 2015, and (ii) $1.92 per share for shares purchased after.  The warrant has a three-year term. The executive officer exercised the warrant in part to purchase 227,894 shares on March 11, 2015 at the price of $1.52 per share. The warrant remains exercisable for 430,000 shares at an exercise price of $1.92 per share. As of March 31, 2015, the total unrecognized compensation cost related to the warrants awarded on March 2, 2015 was $288,000, which is expected to be recognized over the next 35 months.

 

---

 

The Company records compensation expense for warrants based on the estimated fair value of the warrants on the date of grant using the Black-Scholes option-pricing model.  The Company uses historical data among other factors to estimate the expected price volatility, the expected warrant life, the dividend rate and expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the estimated life of the warrant.  The following table summarizes the estimates used in the Black-Scholes option-pricing model related to the warrant grant and exercise prices of $1.52 and $1.92 grants:

 

 

 

On March 2, 2015, the Company granted an equity award of 5,263,152 long-term incentive plan units (“LTIP Units”), representing profit interests in the Company’s operating partnership.  The LTIP Units are earned on one-third increments upon the Company’s common stock achieving price per share milestones of $3.50,  $4.50 and $5.50 respectively.  Earned LTIP Units vest in March 2018, or earlier upon a change in control of the Company, and can be redeemed at the rate of one share of common stock for each eight earned LTIP Units for up to 657,894 of common shares.

 

As of March 31, 2015, the total unrecognized compensation cost related to the LTIP Units was $498,000, which is expected to be recognized over the next 35 months.

 

The Company records compensation expense for the LTIP based on the estimated fair value of the LTIP on the date of grant using the Monte Carlo simulation model.  The Company uses historical data among other factors to estimate the expected price volatility, the expected LTIP life, volume weighted average price and expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield in effect at the time of grant for the estimated life of the LTIP.  The following table summarizes the estimates used in the Monte Carlo option-pricing model related to the LTIP grant:

 

 

 

Investment Committee Share Compensation

 

The independent directors serving as members of the Investment Committee receive their monthly Investment Committee fees in the form of shares of the Company’s common stock issued quarterly under the 2006 Stock Plan, priced as the average of the closing price of the stock for the first 20 trading days for the calendar year.  The number of shares issued to the committee members for the three months ended March  31, 2015 and 2014 were 2,988 and 747, respectively. 

 

---

 

Share-Based Compensation Expense

 

The expense recognized in the condensed consolidated financial statements for the three months ended March 31, 2015 and 2014 for share-based compensation related to employees and directors was approximately $49,000 and $8,000, respectively.

 

Impairment Losses

 

Held for use

 

In accordance with FASB ASC 360-10-35 Property Plant and Equipment – Overall – Subsequent Measurement, the Company analyzes its assets for impairment when events or circumstances occur that indicate the carrying amount may not be recoverable. As part of this process, the Company utilizes a two-step analysis to determine whether a trigger event (within the meaning of ASC 360-10-35) has occurred with respect to cash flow of, or a significant adverse change in business climate for, its hotel properties. Quarterly and annually the Company reviews all of its held for use hotels to determine any property whose cash flow or operating performance significantly underperformed from budget or prior year, which the Company has set as a shortfall against budget or prior year as 15% or greater.

 

Each quarter we apply a second analysis on those properties identified in the 15% change analysis or which have had a trigger event. The analysis estimates the expected future cash flows to identify any property whose carrying amount potentially exceeded the recoverable value. In performing this analysis, the Company makes the following assumptions:

 

 

During the three months ended March 31, 2015 no trigger events as described in ASC 360-10-35 occurred for any of our held for use hotels. The Company did record $0.1 million of recovery of previously recorded impairment loss on one hotel that was moved from held for sale to held for use at the end of the first quarter of 2014.

 

Held for sale

 

Level 3 inputs were used to determine impairment losses on properties held for sale. At March 31, 2015, there were 10 hotel properties that met the criteria for classification as held for sale. In accordance with ASU 2014-08 Presentation of Financial Statements and Property, Plant and Equipment Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity, in the Consolidated Statements of Operations, four of the held for sale hotels are reflected in continuing operations and six of the hotels are reflected in discontinued operations. The amount of impairment and recovery of previously recorded impairment recorded in the quarters ended March 31, 2015 and 2014 on properties classified as held for sale and sold is shown in the table below (in thousands):  

 

---

 

 

In accordance with ASC 360-10-35 Property Plant and Equipment-Overall-Subsequent Measurement, the Company determines the fair value of an asset held for sale based on the estimated selling price less estimated selling costs. We engage independent real estate brokers to assist us in determining the estimated selling price using a market approach. The estimated selling costs are based on our experience with similar asset sales.

 

Income Taxes

We have provided a full valuation allowance against our deferred tax asset at March 31, 2015 and 2014, that results in no net deferred tax asset at March 31, 2015 and 2014 due to the uncertainty of realization (because of

---

 

historical operating losses). The TRS Lessee has estimated its income tax benefit using a combined federal and state rate of approximately 38%.  The TRS net operating loss carryforward from March 31, 2015 as determined for federal income tax purposes was approximately $20.8 million. The availability of such loss carryforward will begin to expire in 2022 through 2034.

The Company is completing an evaluation of the impact, of its recently completed subscription rights offering on its ability to fully utilize all of the net operating loss carryforwards. The Company believes the results of this analysis will likely indicate that a change in control event (as defined for tax purposes) occurred, and the Company will be limited in the use of its net operating loss carryforwards.

 

Noncontrolling Interest of Common Units in SLP

 

Noncontrolling interest in SLP represents the common units’ (“common units”) proportionate share of the equity in the operating partnership. The common units represent both the common operating units and the LTIP units. As of March 31, 2015 and 2014, the limited partners of SLP held 97,008 common operating units, representing approximately 0.1% of the partnership interest in SLP. In March 2015, the Company issued 5,263,152 of LTIP Units, which represent approximately 7.0% of the partnership interest in SLP.

 

Equity Reconciliation of Parent and Noncontrolling Interest

 

(dollars in thousands)

 

 

 

 

 

 

 

 

---

 

Subscription Rights Offering

 

The Company concluded a subscription rights offering on June 6, 2014.  Each subscription right entitled its holder to purchase one share of common stock of the Company for $1.60 per share.  Subscription rights to purchase 1,787,204 shares of common stock were exercised for $2,859,526, of which $2,000,000 was paid by conversion of a loan owed by the Company to RES. The Company incurred issuance costs of $217,852.

 

Series B Redeemable Preferred Stock

 

At March 31, 2015  there were 332,500 shares of 10.0% Series B preferred stock outstanding. The shares were sold on June 3, 2008 for $25.00 per share and bear a liquidation preference of $25.00 per share. 

 

Dividends on the Series B preferred stock are cumulative and are payable quarterly in arrears on each March 31, June 30, September 30 and December 31, or, if not a business day, the next succeeding business day, at the annual rate of 10.0% of the $25.00 liquidation preference per share, equivalent to a fixed annual amount of $2.50 per share.  Dividends on the Series B preferred stock accrue whether or not the Company has earnings, whether or not there are funds legally available for the payment of such dividends, whether or not such dividends are declared and whether or not such dividends are prohibited by agreement. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series B preferred stock to preserve capital and improve liquidity. Accumulated but unpaid dividends on the Series B preferred stock will not bear interest. Accumulated but unpaid dividends are $1.2 million or  $3.75 per share as of March 31, 2015. These dividends are not reflected as an obligation on the balance sheet.  Holders of the Series B preferred stock generally have no voting rights. However, if the dividends on the Series B preferred stock are in arrears for six or more quarterly periods (whether or not consecutive), holders of the Series B preferred stock, voting together as a single class with all series of preferred stock for which like voting rights are exercisable, will be entitled to elect two directors. Currently the holders of the Series B preferred stock, voting as a single class with the Series A preferred Stock, have the right to elect two directors at the next annual shareholders’ meeting. The terms of such directors will end up to twelve months after all dividend arrearages have been paid. 

 

The Series B preferred stock will, with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, rank: (a) senior to the Company’s common stock, (b) senior to all classes or series of preferred stock issued by the Company and ranking junior to the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or winding up, (c) on a parity with the Company’s Series A preferred stock and Series C convertible preferred stock and with all classes or series of preferred stock issued by the Company and ranking on a parity with the Series B preferred stock with respect to dividend rights or rights upon the Company’s liquidation, dissolution or winding up and (d)  junior to all of the Company’s existing and future indebtedness.

 

The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares, unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The Series B preferred stock has no stated maturity and is not subject to any sinking fund or mandatory redemption (except as described below).  

 

The Series B preferred stock was not redeemable prior to June 3, 2013, except in certain limited circumstances relating to the maintenance of the Company’s ability to qualify as a REIT as provided in the Company’s articles of incorporation or a change of control (as defined in the Company’s amendment to its articles of incorporation establishing the Series B preferred stock).  The Company may redeem the Series B preferred stock, in whole or in part, at any time or from time to time on or after June 3, 2013 for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. Also, upon a change of control, each outstanding share of the Company’s Series B preferred stock will be redeemed for cash at a redemption price of $25.00 per share, plus all

---

 

accrued and unpaid dividends. At March 31,  2015, no events have occurred that would lead the Company to believe redemption of the preferred stock, due to a change of control or failure to maintain its REIT qualification, is probable. 

 

Series A Preferred Stock

 

On December 30, 2005,  the Company offered and sold 1,521,258 shares of 8% Series A preferred stock.  At March  31,  2015, 803,270 shares of Series A preferred stock remained outstanding.  Dividends on the Series A preferred stock are cumulative and are payable monthly in arrears on the last day of each month, at the annual rate of 8% of the $10.00 liquidation preference per share, equivalent to a fixed annual amount of $.80 per share. The Company may redeem the Series A preferred stock, in whole or in part, at any time or from time to time for cash at a redemption price of $10.00 per share, plus all accrued and unpaid dividends. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series A preferred stock to preserve capital and improve liquidity. Unpaid dividends will accumulate and bear additional dividends at 8%, compounded monthly. Accumulated but unpaid dividends are $0.9 million, or $1.12 per share, as of March 31, 2015. These dividends are not reflected as an obligation on the balance sheet. Holders of the Series A preferred stock generally have no voting rights. However, if dividends on the Series A preferred stock are in arrears for six consecutive months or nine months (whether or not consecutive) in any twelve-month period, holders of the Series A preferred stock, voting together as a single class with all series of preferred stock for which like voting rights are exercisable, will be entitled to elect two directors. Currently the holders of the Series A preferred stock, voting as a single class with the Series B preferred stock, have the right to elect two directors at the next annual shareholders’ meeting. The terms of such directors will end up to twelve months after all dividend arrearages have been paid. 

 

The Series A preferred stock with respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, ranks senior to all classes or series of the Company’s common stock, senior or on parity with all other classes or series of preferred stock and junior to all of the Company’s existing and future indebtedness. Upon liquidation all Series A preferred stock will be entitled to $10.00 per share plus accumulated but undeclared dividends. The Company will not pay any distribution, or set aside any funds for the payment of distributions, on its common shares unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The outstanding preferred shares do not have any maturity date, and are not subject to mandatory redemption.

 

The Company will not pay any distributions, or set aside any funds for the payment of distributions, on its common shares, unless it has also paid (or set aside for payment) the full cumulative distributions on the preferred shares for the current and all past dividend periods. The Series A preferred stock has no stated maturity and is not subject to any sinking fund or mandatory redemption.

 

Series C Convertible Preferred Stock and Warrants

 

The Company entered into a Purchase Agreement dated November 16, 2011 for the issuance and sale of Supertel’s Series C convertible preferred stock and warrants under a private transaction to RES. On January 31, 2012 at a special meeting, the shareholders of Supertel, by the requisite vote, approved the issuance and sale of up to 3,000,000 shares of the Series C convertible preferred stock of Supertel, shares of common stock of Supertel which may be issued upon conversion of the Series C convertible preferred stock, and warrants to purchase additional shares of common stock, to RES pursuant to the Purchase Agreement. In two closings on February 1, 2012 and February 15, 2012, the Company completed the sale to RES of 3,000,000 shares of Series C convertible preferred stock and warrants to purchase shares of common stock. 

 

Each of the 3,000,000 shares of Series C convertible preferred stock is convertible, in whole or in part, at RES’s option, at any time, but subject to RES’s beneficial ownership limitation, into the number of shares of

---

 

common stock equal to the $10.00 per share liquidation preference, divided by the conversion price then in effect.  As a result of the subscription rights offering concluded on June 6, 2014, the conversion price was adjusted downward from $8.00 to $1.60, equal to the public offering price of our common stock in the subscription rights offering. Pursuant to the terms of warrants held by RES to purchase up to 3,750,000 shares of common stock, the exercise price of the warrants was adjusted downward from $9.60 to $1.92 per share, equal to 120% of the adjusted conversion price of the Series C convertible preferred stock.    

 

Each share of Series C convertible preferred stock is entitled to a dividend of $0.625 per year payable in equal quarterly dividends. Each share of Series C convertible preferred stock has a liquidation preference of $10.00 per share, in cash, plus an amount equal to any accrued and unpaid dividends.  With respect to dividend rights and rights upon the Company’s liquidation, dissolution or winding up, the Series C convertible preferred stock ranks: (a) on  a parity with the Series A preferred stock and Series B preferred stock and other future series of preferred stock designated to rank on  a parity, and (b) senior to the common stock and other future series of preferred stock designated to rank junior, and (c) junior to the Company’s existing and future indebtedness. Commencing with dividends due on December 31, 2013, the Company suspended payment of dividends on its Series C cumulative preferred stock to preserve capital and improve liquidity. Unpaid dividends will accumulate and bear additional dividends at 6.25%, compounded quarterly. Accumulated but unpaid dividends are $2.9 million, or $0.975 per share, as of March 31, 2015. These dividends are not reflected as an obligation on the balance sheet.

 

The Series C convertible preferred stock, at the option of the holder, is convertible at any time into common stock at a conversion price of $1.60 for each share of common stock, which is equal to the rate of 6.25 shares of common stock for each share of Series C convertible preferred stock. A holder of Series C convertible preferred stock will not have conversion rights to the extent the conversion would cause the holder and its affiliates to beneficially own more than 34% of voting stock (the “Beneficial Ownership Limitation”). “Voting stock” means capital stock having the power to vote generally for the election of directors of the Company. A holder of warrants would similarly not have exercise rights to the extent the exercise of a warrant would cause the holder and its affiliates to own capital stock in an amount exceeding the Beneficial Ownership Limitation.

 

The Series C convertible preferred stock will vote with the common stock as one class, subject to certain voting limitations. For any vote, the voting power of the Series C convertible preferred stock will be equal to the lesser of: (a) 0.78625 vote per share or (b) an amount of votes per share such that the vote of all shares of Series C convertible preferred stock in the aggregate equal 34% of the combined voting power of all the Company voting stock, minus an amount equal to the number of votes represented by the other shares of voting stock beneficially owned by RES and its affiliates. 

 

As long as RES has the right to designate two or more directors to the Company Board of Directors pursuant to the Directors Designation Agreement, the following requires the approval of RES and IRSA Inversiones y Representaciones Sociedad Anonima (“IRSA”):  

 

Commitments and Contingencies

Litigation 

---

 

 

Various claims and legal proceedings arise in the ordinary course of business and may be pending against the Company and its properties. Based upon the information available, the Company believes that the resolution of any of these claims and legal proceedings should not have a material adverse effect on its consolidated financial position, results of operations or cash flows.

 

Liquidity 

 

The following disclosure and analysis is pursuant to ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ASU 2014-15 requires the Company to evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about its ability to continue as a going concern within one year after the date the financial statements are issued.  To satisfy the requirements of the new standard, the Company’s evaluation considered a 13 month period beginning March 31, 2015.

 

The Company performs a liquidity analysis to determine if expected hotel operating cash flow is sufficient to cover all of the Company’s obligations as they become due, in this case, beginning on March 31, 2015 and ending on April 30, 2016.  Our initial analysis considered only available cash and operating cash inflows without consideration of cash inflows from transactions that are in process, but were not yet finalized, such as proceeds on asset dispositions that are not yet closed or proceeds from financing transactions.

 

The Company believes the available cash of $0.3 million at March 31, 2015, cash generated from the operations of the hotels as well as the $3.3 million of net cash proceeds from the sale of two hotels in April of 2015 will be sufficient to cover corporate overhead, recurring monthly debt service and anticipated capital improvements, estimated to be $4.9 million, $7.5 million and $6.3 million, respectively (excluding loans maturing in 2015, there are no loans maturing in 2016).  

 

In response to the liquidity levels, as well as part of our long term plan to divest ourselves of economy and midscale hotels as we transition to upper midscale, upscale and upper upscale hotels, the Company reviews its entire portfolio each year and identifies properties considered non-core and develops timetables for disposal of these assets deemed non-core.  We focus on improving our liquidity through cash generating asset sales and the disposition of assets that are not generating yields consistent with our investment objectives or reinvestment alternatives.  Our ability to dispose of these assets is impacted by a number of factors. Many of these factors are beyond our control, including general economic conditions, availability of financing and interest rates.

 

At March 31, 2015, we have 10 hotels held for sale which, if sold, we believe will generate $17.8 million in net proceeds after debt repayment over the 13 month period. Over the last five years, we have sold 63 hotels.  However, with respect to future hotel sales, we cannot predict:

 

At December 31, 2014 we had $46.9 million of debt maturing in 2015 (no debt matures in 2016). As of March 31, 2015, we have reduced that obligation to $36.3 million through amortization and repayment from the proceeds of hotel sales.  Since the end of the first quarter of 2015 through the date of our filing the obligation was further reduced to $32.2 million; the company applied an additional $4.1 million to debt using a portion of the proceeds from the sale of two of our GE encumbered hotel assets.  The $32.2 million of maturing debt, for which we do not have committed funding, consists of the following:

 

---

 

The Company anticipates that the net proceeds on the sale of GE and Middle Patent Capital, LLC encumbered assets classified as Held for Sale will be sufficient to repay the maturing GE and Middle Patent Capital, LLC loans.  The Company plans to meet the obligations at maturity on the Great Western Bank revolving line of credit and the Citigroup Global Markets Realty Corp. mortgage loan by using a combination of refinancing and the proceeds from dispositions of two hotels held for sale. Over the past two years the lending market has experienced increased liquidity and a relaxing of underwriting standards and as such, we believe we will be able to refinance on similar or perhaps more favorable terms. However, notwithstanding our perception that the lending market has improved somewhat, we may not be successful in our efforts to refinance or repay our maturing debt. As of March 31, 2015 we are not in default under the terms of any of our loans. However on November 12, 2014, the Company received a waiver from Great Western Bank for non-compliance with respect to the consolidated leverage ratio, and on November 20, 2014 the credit facilities were amended to modify the consolidated leverage ratio. The Company believes that we will be compliant under the terms of all of our loans in 2015.

 

The Company has an obligation to Real Estate Strategies, L.P. (“RES”) to use $25 million of the proceeds from its capital infusion in 2012 to pursue hotel acquisitions.  In February 2012, the Company issued 3.0 million shares of Series C convertible preferred stock to Real Estate Strategies, L.P. which provided $28.6 million of net proceeds.  As of February 28, 2015, we have used $9.1 million for debt repayment and $3.7 million for operational funds from the proceeds committed to hospitality acquisitions.  There are no contractual restrictions or penalties related to the use of these funds for purposes other than acquisitions.  The Company is obligated to replace these funds promptly as it has the ability to do so.  The Company is exploring opportunities to satisfy its long term capital needs as well as replenish the acquisition fund.  There can be no assurance that the Company will be able to obtain the funding to replace these funds, however, the Company believes the growth of the Company is in the best interest of all shareholders.

 

The Company did not declare a common stock dividend during the first quarter of 2015 or the years 2014, 2013 or 2012.  In December 2013, the Company announced the suspension of the regular dividends on its outstanding preferred stock to preserve capital and improve liquidity.  The Company will monitor requirements to maintain its REIT status and will routinely evaluate the dividend policy.

 

Possible sources of liquidity to fund the longer-term liquidity needs, pay the preferred dividends, and satisfy the commitment to RES, include additional secured or unsecured debt financings, and /or proceeds from public or private issuances of debt or equity securities.

 

The Company has had recurring losses from operations and has a substantial amount of debt maturing in 2015 for which the Company does not have committed funding sources. Our ability to continue as a going concern is dependent on many factors, including among other things, improvements in our operations results, our ability to sell properties and our ability to refinance maturing debt. While, as described above, the Company has plans to address these liquidity needs, there can be no assurance that the Company will be successful in those efforts. Consequently, these conditions raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements have been issued.

 

 

---

 

Subsequent Events

 

On April 1, 2015, the Company sold two Savannah Suites hotels. The hotel in Chamblee, Georgia (120 rooms) sold for $4.4 million, and the hotel in Augusta, Georgia (172 rooms) sold for $3.4 million. Partial proceeds of $4.1 million were applied to the associated debt with GE, with the remainder going to cash.

 

On April 13, 2015, the Company entered into an agreement to sell two hotels located in Alexandria, Virginia for a purchase price of $19.0 million. The properties are subject to associated debt of $8.3 million. The sale is subject to the completion of an inspection period without termination by the purchaser (which may be with or without reason during the inspection period) and customary closing conditions. The inspection period ends May 8, 2015, but may be extended by purchaser, upon payment of $100,000, for an additional 30 days. On May 1, 2015, the Company amended the agreement to extend the inspection period to May 18, 2015. The amendment also changed the right to extend the Inspection Period by 30 days to 20 days.

 

On April 30, 2015, the Company sold a Super 8 in Batesville, Arkansas (49 rooms) for $1.5 million. $1.3 million of the proceeds were applied to the revolving credit facility with Great Western Bank, reducing the outstanding revolver balance by $1.3 million and the revolver limit from $12.5 million to $11.2 million. The remainder of the proceeds went to cash.